New CEO To Drive Efficiencies For Union Pacific Despite Weaker FY23 Outlook, Analyst Boosts Target By 15%

Benchmark analyst Nathan P. Martin reiterated the Buy rating on Union Pacific Corporation UNP, raising the price target to $264 from $230.

The company recently reported a second-quarter FY23 operating revenue decline of 5% year-over-year to $5.96 billion, missing the consensus of $6.12 billion. UNP mentioned that softening consumer markets, inflation, one-time labor expense, and increased workforce levels impacted the quarter.

The analyst notes that UNP is also forecasting a second-half $50 million-$70 million labor expense headwind.

Regardless, shares were up as the board announced industry veteran Jim Vena would take over as CEO next month, Martin adds. Vena oversaw the implementation of PSR at UNP as the company’s COO from 2019-2020, and the analyst expects that he will lean on his extensive operating experience to help drive efficiencies and further improve service at the rail. 

Notably, management called out opportunities to lower costs across multiple expense categories, and the analyst believes that productivity and service should improve, unlocking potential business from a pipeline up 20%-25% in a down market.

As for RPU, UNP has complete confidence in its ability to price above inflation; however, it estimated a lower y/y fuel surcharge could be a $0.50/sh drag in 2H. 

However, the analyst lowered the 3Q EPS estimate to $2.83 from $2.97 based on a 2% y/y decline in carloads and a 4% y/y decrease in RPU.

Martin also lowered full-year EPS estimate to $10.85 from $11.34. The analyst assumes revenues decline 2% y/y and the OR deteriorates 100 bps.

Price Action: UNP shares are trading lower by 2.65% to $231.70 on the last check Thursday.